Market News

 February 25, 2007
Blow for beer as biofuels clean out barley

 (By Kevin Morrison in London) - The rapid expansion of biofuel production may be welcome news for environmentalists but for the world's beer drinkers it could be a different story.

Strong demand for biofuel feedstocks such as corn, soyabeans and rapeseed is encouraging farmers to plant these crops instead of grains like barley, driving up prices.

Jean-François van Boxmeer, chief executive of Heineken the Dutch brewer, warned last week that the expansion of the biofuel sector was beginning to cause a "structural shift" in European and US agricultural markets.

One consequence, he said, could be a long-term shift upwards in the price of beer. Barley and hops account for about 7-8 per cent of brewing costs.

Barley, which is used for making beer, whisky and animal feed, has seen prices prices soar over the last 12 months.

Futures prices for European malting barley, which is used for brewing and distilling, have risen 85 per cent to more than €230 ($320) a tonne since last May.

Barley feed futures have risen by a third to C$180 ($155) a tonne on the Winnipeg Commodity Exchange over the same period.

Meanwhile, barley production in America fell to 180.05m bushels in 2006, the lowest level since 1936. The value of the crop was the lowest since 1970 -- at $498m.

This decline is partly due to the fall in the land area used for growing barley, which dropped to about 2.95m acres -- the lowest since records began in 1866.

The rise in barley prices has also been driven by the Australian drought, which cut the country's crop by two-thirds, and heavy rains in Europe last summer which reduced the quality and yield of the harvest.

The US department of agriculture estimates global barley production will reach 138m tonnes in the year to August, level with 2006 but down 10 per cent on 2005. Global demand for barley has risen 2 per cent to an estimated 145.5m tonnes this year, the fourth year in the last five in which demand has exceeded supply.

As a result, global stockpiles have shrunk by a third in the past two years and left the barley trade vulnerable to further supply problems this year.

"In the US, land that was cultivated for growing barley has been given over to corn because of the ethanol demand," said Levin Flake, a grains trade analyst at the US department of agriculture.

The US, which in the 1980s was a leading exporter of barley, is now a net importer as barley acreage has shrunk from more than 13m acres in 1985 to 4m this year, said Mr Flake.

The USDA expects US barley acreage over the next 10 years to remain flat. That might not be the case for the price of beer.

Source: The Financial Times Limited 2007